The Consolidation Threat

Hospitals and healthcare systems have been big players in the current culture of ever-rising costs in the industry, and a rapidly growing trend of consolidation appears to be making things worse.

Back in 2011, The New York Times reported that a “majority” of physicians are employees of hospitals, rather than independent owners of small group practices.

According to Fierce Healthcare:
“The number of physicians employed by hospitals grew by 14,000 between July 2015 and July 2016, representing nearly 11% growth. The trend goes hand-in-hand with the rising number of hospitals that are buying physician practices–a whopping 5,000 transactions during the same period.”

That was just in one year. The trend has only continued and intensified.

According to The New England Journal of Medicine, hospitals aren’t making any money off of this trend–in fact, they lose $150,000-$250,000 per year over the first three years of employing a physician.

“Hospitals are willing to take a loss employing PCPs in order to influence the flow of referrals to specialists who use their facilities.”

Did you catch that? The hospitals are willing to stomach a loss so they can wield greater influence with other subcontractors. By shutting out competitors who don’t use their facilities, they can more than recoup the costs with their preferred partners.

And doctors are more than willing to sell, since, according to Forbes, “ObamaCare increases the costs that a physician faces by continuing to run her own independent medical practice (with elements such as mandates to install costly electronic record keeping)…” and it allows “outpatient procedures to be better compensated when they are performed inside a hospital owned practice versus an independent physician’s office.”

WhitecoatInvestor.com shares:
“Owners have overhead expenses, such as administrative salaries, insurance, equipment, and operating costs, which can eat into profits. It can be stressful to run a medical practice also. Changing regulations such as ICD-10 add a significant expense to a smaller practice. Keeping up with insurance requirements and reimbursements can make accepting certain patients prohibitive.”

Plus, doctors don’t have the bargaining power to demand more money from insurance providers, even as those costs rise. It’s easy to let it be the hospitals’ problem.

As the hospitals gobble up the independent practices, The Forbes article boils down the critical side effect:

“All of these elements have had the predictable effect of driving consolidation of medical practices around the hospitals. This is going to raise healthcare costs, and lower productivity across the medical marketplace.”

Northern California is, according to the Los Angeles Times, the most expensive place in the U.S. to have a baby, and a big part of that is the dominance of hospitals in the area.

Plus, there’s less autonomy for individual doctors, as the hospital administration can require certain processes and services. Although some of the difficulties of being a doctor are relieved when they join a hospital system, new problems arise. For example, studies show that hospital doctors spend more than 10 percent longer on reports than private practice doctors.

Forbes contributor Scott Gottlieb says there’s plenty of reason to be concerned, due to “ample evidence” that once doctors become salaried employees of hospitals, their productivity declines.

He expounds:
“[T]here are a number of well-done studies that all show that productivity declines, sometimes substantially. Private companies that purchase physician practices will concede they also impute productivity declines when they buy these assets — and bake these assumptions into the hurdle rate that they use when estimating what purchase price they’re willing to pay.”

Although the hospitals’ ever-growing armies of doctors give them the bargaining power they need to negotiate rates, eliminate competition and encourage cooperation, they aren’t the only game in town.

Captiva Benefit Solutions uses the Health Rosetta paradigm to allow companies to have formidable negotiating power of their own, breaking the cycle of out of control costs while providing a level of transparency that is nearly impossible to find in the mainstream healthcare culture.